United States. Congress. Senate. Committee on the.

The Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) online

. (page 106 of 140)
Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 106 of 140)
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sale prices by establishing a monthly rental multiple for the product that is
equivalent to the number of months of rent that IBM reasonably expects to
receive for that product. The rental-sale multiple for each machine may be
different — based on the estimate of product life. When IBM is paid the full
economic value of a product sold, it expects the prodiict to be used for its full
• product life. Peripheral products separately leased by other companies or by
IBM are not niunerous, and leasing companies most generally lease systems or
a combination of peripherals and CPU's. There is a substantial amount of IBM
equipment owned by leasing companies. The pricing of leasing companies is con-
strained or affected by IBM's pricing policies, which may neutralize to an extent
the competitive effect of leasng company activities as to IBM pricing.

F49. The court has not been unmindful of these and other circumstances
and arguments pressed upon it by IBM in attempted demonstration that since
its predatory acts or market power have not been proved in respect to the
EDP industry or the systems market as a whole, it cannot be vulnerable to a
charge of monopoly by reason of the interrelationship among components of
the industry. Some practical considerations among other more imponderable
ones militate against such a theory: (1) The pattern for a divide and conquer
strategy of monoply which its acceptance would permit and foster, and (2) in
the realities of the market and of competitive conduct, neither IBM, its competi-
tors nor the public have experienced difficulty in subdividing the EDP industry
into markets roughly equivalent to the classification contended for by plain-
tiffs. IBM recognized as early as 1964 that a separate and distinct market
for input/output peripheral products that were plug compatible to IBM central
processing units was developing. For several years IBM studied possible market
and product actions which would minimize potential entry of new competitors
into that market. Plug compatil)le manufacturers have been defined in IBM
internal documents as "those manufacturers which merely have to plug into IBM
hardware to be operable".

FoO. In late 1969 "•peripherals" were designated as a "key corporate strategic
issue" — (KCIS"') — by IBM's management committee. The key peripherals
issue was limited to selected competitive compatible products which replaced
IBM products in an IBM computer system. In IBM's internal processing and
study of this issue "competitive compatible products" were described as "system
attached input/output and memory products" including "magnetic tape drives
and control units — direct access storage products and control units — impact
printers and control units." Memory products were both "main" and "large
•capacity storage". Excluded were central processing units, consoles, paper tape
products, communication products and control units, information display products
and control units. RPQ's and non-standard products, and non-system attached
products. The objective of designating peripherals as a KCSl" was to assess
the factors affecting both current and future competitive compatible peripheral
products; to review IBM strategies, policies and practices so as to identify
exposure areas ; and to recommend actions to reduce or eliminate such exposures.
These plug compatible products were treated by IBM for competitive studies,
strategies and other purposes as separate economic entities. And, particularly,
IBM recognized for said purposes central processing units, memory products,
consoles, paper tape products and control units, communication controllers
and related communication products, magnetic tape products and control units,
direct access di.sk drives and sub.systems. and impact printers and control unit.s,
as separate economic entities. This separate consideration and treatment no
doubt is ascribable in part to convenience of record keeping, comparison of
data, effectiveness of evalaution and such factors, but with reference to inem-
ory products, magnetic tape products and control units, direct access disk drives
and subsystems and impact printers and control units, in view of the competi-



5722

tion of other marketers furnishing devices plug compatible to IBM machines,
such suppliers, IBM and the industry in general came to regard these lines
especially as representing separate economic entiries as a result, and for the
purpose, of actual competition in the marketplace.

F51. IBM's 2310A-y product and marketing actions hereinafter discussed
affected and were intended to affect directly only one type of product, its 2314
type equipment, and \Yere particularly intended to reduce profits for Telex and
Memorex on this type of product. The only IBM products forecasted by it to lie
protected by IBM's Fixed Term Plan (FTP) was IBM's tape, disk, and printer
products. The only competitive products forecasted by IBM to be affected by
FTP were plug compatible manufacturers" tape, disk and printer products.
When, as here, predatory action is selective and focused, and its anticompetitive
effects are .similarly shunted away from a move general market, corresponding
submarkets should l)e more readily recognized. IB^M has made the. persuasive
argument that a market concept based on the idea that every manufacturer has
a monopoly in each of the components of its prduct is too sweeping, and neces-
sarily tlawed. the flaw being "the disregard of economic forces operating in the
markets where manufacturers compete." With such a generalization there can be
large agreement. But the critical flaw in application to the circumstances of this
case, it seems to me, would be created by ignoring the separate market and sub-
markets within which IBM waged its predatory competitive battles and which
l>ecame and were thereby made separate competitive entities in the marketplace
and within which monopoly power existed and was exercised.

F52. The Cdurt hnds that the peripheral devices plug compatible with the
CPU's of IBM may be considered the relevant market for the purpos.es of this
ca.se, and that relevant submarkets existed for plug compatible tapes, disks,
memories and printers with their respective controllers, and communications
controllers.

F53. CPU's are not reasonably includable within this market and these sub-
markets, nor are software as such, but the peripheral equipment plug com-
patible to IB:\I CPUs' which are separately leased by leasing companies to
eiul-usvn-.s are. Alternate sources of computer time i^uch as service bureaus, time-
sharing companies, data centers, users selling excess time and the like are not
reasonal)ly includable in the relevant market or submarkets with which we are
concerned in this case, since their competitive relationships- are tangential and
indirect, and do not supply a real or substantial competitive force in the relevant
markets mentioned. It is true that a large part of the competition in the industry
takes place on a systems basis, but the relationship of this competition to the
relevant markets with which we are concerned again is tangential and prac-
tically indiscerni'ule. Certainly in another context the competition between sys-
tems manufacturers would constitute, or be a part of, a relevant market, but
such relevant market is not material under the fact.s of this case since the
competition involved here is not between systems manufacturers but between
IB^I and plug compatible manufacturers and suppliers.

F54. Xor do the alternate ways of storing data in an EDP system justify the
commingling or comliination of subnmrkets. The evidence indicates that objec-
tives and applications are the controlling factors in the use of alternatives and
not necessarily price. While in s-pecial instances price may have att'ected par-
ticular .selections as between alternatives, the applications and ol)jectives of
an operation have dictated not only the selection but the price/performance ratio
irself in most instances. It is more theoretical than real to say that inter-
changeability of use (U- demand as between tapes and dis-k storage, for instance,
precludes the con.sideration of these .'^•ubmarkets separately. Nor do the trade-
offs possible as between the higher perfin-mance of memory for the lower
price of disks avoid these practical conse(iuences. It is true that if memory
were les;-. expensive the user might extend the use of memories for the storage
function rather than to utilize disks to the extent he does. This does not obviate
tlie competitive reality that as between disk drives and memories a valid su'n-
niarket lioundary line exists. The reality of this situation ajipears to be that
despite S(nne theoretical interchangeability. a rise in the price of one storage
device will cause a substantial number of customers to turn to similar devices
less expensive rather than to iise fewer of such devices and more of other typf^s
of devices. It is true, also, that to some extent certain storage devices, sucJi as
memories, are interchangeable with CPU's themselves, and that u.sers can and
do choos-e between larger or faster CPU's with relatively small amounts of
memory and smaller or slower CPU's with relatively large amounts of memory.



5723

In the realities of the marketplace this, however, has not critically affected
the competition between sni)i)liers of memory or disk products compatible with
IB.M CPU's, nor does the circumstance of theoretical interchangeability mean
that both rPr"!->and memory belon.^ in the same relevant market.

Foo. The fore,H(»in.u; determinations have been made, it is believed, with due
re.t;ard for the authorities concerning interchangeability of u.se, cross-elasticity
of dennuid and supply substitutability. and defendant's arjiuments based there-
on. .Mere theoretical cross-elasticity without substantial impact in the market-
place in relationship to demand/price has not been deemed determinative. For
every product economic .substitutes exist. To be included in the same market
it is not sufficient that a few customers would shift from one product if its
l»ricc. relative to the price of another, were rai.sed. On the other hand, if of course
is not neces.sary that products be identical. "Supply substitutability" may not
be disregarded. Manufacturers who have existing technological capabilities or
tooling to supply reascmably interchangeable products may effectively restrain
the power of th(is<^ in the market to raise prices, 'out the evaluation of whether
this is so, again, is dependent not upon mere theory but up(tn the reality if any
of the effect of the potential in the marketplace. While the potential need not
necessarily be an iunnediate one, it nuist not be so remote as to have no actual
intluence on the competitive situation. A relevant market cannot be enlarged
liy theoretical speculation as to future market conditions or potential sub-
stitutability having no substantial eft'ect upon competition during a period in
(piestion. I tind that neither cross-elasticity or interchangeability of use or
demand, nor substitutability of supply, critically militates against the relevant
market and subniarket definitions within which IBM's market power will now
be as.-j-essed.

V. MARKET P0W?:R

F56. Monopoly power is the economic ability to charge unreasonably higli
prices and to exclude competition. Proof of the actual use of such power for
these purpo.ses is not essential to a finding of its existence but would be an
important factor in any a.^^sessment of market power. The strength of com-
petitors is relevant to an assessment of market power. Monoi»oly power pre-
supposes the power to control what happens in a relevant market. Ease of
entry may be an indication of lack of market power on the part of an alleged
monopolist. Difficulty in entering, weakness of competing companie.'* and de-
pendence of competitors upon dominant forces in the market are among indicia
(if market control on the part of an alleged monopolist. Necessity of competitors
to react to price changes by the alleged monopolist, particularly above or below
a scale based upon self-determined rea!-)nable cost and prottt may be important.
If the percentage of a relevant market controlled by an alleged monopolist is
high an inference of market power may be drawn. Where its control is moderate
no inference of market contrrd may be permissible. In case of a medium range,
it may be imixissible to infer or to rule out monoiioly. so that factors other than
market i)ercentage uuist be looked to primsxrily. Where there is direct credible
evidence of market domination or predatory practices which are productive of
contol in a particular relevant market, inferences need not be depended upon
but this more direct evidence may be determinative.

Other factors to be con.^idered are any necessity on the part of an alleged
monopolist to meet ccmipetition in technology and pricing, the equality of per-
fornuince in the industry and its comparative youth, growth and dynamics or
change. Claimed necessity of responding to' competitive inliuences beyond the
control of the alleged monopolist may be only its excuse for antic<)mpetitive con-
duct for the pur))ose of maintaining nv extending monopoly power or to surmount
llireatened competition, and monopoly is possible in a young, dynamic and complex
industry as well as in an old or static one. and may be even more feasible in special
cases through masking of selective market strategies in the overall technological
developments. Sophistication of users or competitors may discourage monopc^Jy
hut equal or greater sophistication on the part of an alleged monopolist may he a
counterbalancing factor, and industry dynamics nmy continue in evidence through
technological UM/mentum beyond the inception of monopoly. While these and other
criteria and their limitations have been considered, it is recognized that the
question of monopoly control is one of fact to be determined on the whole record
and not susceptilile of being res(rlved by any mechanical ajjplications.

FoT. By their arguments and proposed findings, plaintiff's would have the court
find that in tlie period I'.Hi!) to 1!)72 IBM ixissessed monopoly market power in a
general systems relevant market as well as in the more limited relevant plug



5724

compatible market and the submarkets for magnetic tape products, direct access
storage products, memory products, impact printer products, and communication
controllers that are plug compatible with an IBM central processing unit. Little
or no evidence was introduced in these cases that IBM evidenced an intent to
monopolize, or directed efforts toward monopolization of the EDP systems market
in general, except through its more focused conduct. Presumably plaintiffs now
do not wish to rest their case entirely upon their plug compatible market theory,
or at least consider that the dominant position of IBM in the general market sup-
ports, or lends substance, to its claims that IBM monopolized or attempted to
monopolize the plug compatible market or submarkets. On the other hand, the
position of IBM in the general market lends increased force to its arguments
C(mcerning its declining market share, the dynamics of the industry, the strength
of competitors, and other factors tending to negate a monopoly position. While
it is believed that the position of IBM in the general EDP industry, particularly
with reference to general systems, is relevant, the evidence is insufficient for a find-
ing, and it is unnecessary in the court's view to find in order properly to resolve
this case, that IBM during the relevant period monopolized or attempted to
monopolize the general systems market.

F.58. There is no question but that IBM occupied, and continues to occupy, an
important position in the systems market. In 1970 revenues reported from elec-
tronic data processing prodiicts and services according to the census, IBM was
the leading company in the industry, with almost $.3. .5 billion of revenue. AT&T
which is not a systems manufacturer was next largest in terms of EDP revenue,
$7.59,435,000. Of the next three largest companies, Univac (Sperry Rand), Honey-
well and Control Data, none had EDP revenues in excess of $460 million. Internal
IBM documents containing measurements of IBM's share of the domestic market
for systems and peripherals place IBM's market share progressively decreasing
from 75.9% in December, 1964. to 73.3% in September, 1968, and IBM's market
share of central processing units (CPU's) progressively decreasing from 68.6%
in 1964, to 64.4% in 1968.

F59. Defining the market broadly, as IB]M claims it should be. competitors
include many large diversified companies with important skills and substantial
financial resources, and many competitors are strong, independent and growing.
E:ntry into such a broad market has not proved difficult for many companies.
Between 1952 and 1970 the number of competitors in the EDP industry multiplied
more than 136 times, from 13 to 1773, according to the census. The total United
States EDP revenue has increased about 212 times from .$48 million in 1952 to
.$10.2 billion in 1970. Many companies, in addition to IBM. have shown spectacular
gron-<:h, although none to the extent IBM has. The number of companies which
manufactured systems increased from 3 in 1952 to 96 in 1972. IBM's technology,
and its organization and diligence in advancing it, have been of high quality, con-
tributing in a substantial degree to IBM's general success in the industry. There
is little or no indication in the evidence introduced in this case that IBM adopted
specific programs to throttle or impede general sy.stems competition or that it
sought to implement any predatory intent with respect to the EDP industry as a
whole, as distinguished from efforts directed specifically against the marketers of
peripheral equipment plug compatible to its CPU's.

F60. Generally speaking, EDP customers have been furnished with pro-
gressively better products at progressively lower prices. Memory capacity has
increased by a factor of approximately 700 from the Univac I to the IBM 370/168.
Performance of the CPU as measured in the execution of additions, multiplica-
tions and divisions per second had increased by a factor of over 4300. 3100. and
2000. respectively, from the Univac I to the IBM 370/168. The fourth generation
370/168 costs only a little less than seven times as much as the first generation
Univac I. The performance of tape drives as measured by the transfer of charac-
ters per second has increai^ed by a factor of 46 from the tape drive used with
Univac I to tiie tape drive used with the 370/168 for an approximately 1-;^ price
increase. Tliere has been a 16 fold increase in storage capacity as well. From the
.first to the fourth generation, there has been a 13 times performnnce improve-
nient in printers for less than 3 times the price increase. There has been a 37
times performance imprnvenient and a 20% drop in price in dii^k files from the
first to tlie fourth generation. The requirements of electronic data processing
user - , and the profusion of companies attempting to fill those needs, have led to a
marked increase in the performance of products and significant decrease in the
cost i->er unit of computing. Broadly defined the EDP industry appears compet-
itive and dynamic.



5725

F61. IBM's market share of the EDP industry as a whole or the general sys-
tems (CPU) market does not of itself justify an inference of monopoly power
iu the market as so broadly defined, or at least as to this plaintiffs have not dis-
charged their burtlen of proof to show monopoly power as a part of their monop-
oly complaint : According to the census, IBM's 11)70 share of reported EDP reve-
nue for hardware and leasing companies over $5 million, 42.37o ; its 1!>70 share
of reported EDP revenue for hardware companies over $5 million, 44.990 ; its
li>70 share of reported EDP product revenue, 44.5%. IBM's share of the value of
1971 shipments of "electronic computers and peripheral equipment, except parts",
according to the U.S. Bureau of the Census, was oU.79o. IBM's .share of the value
of 1971 sliipments of "Electronic Computers, Digital, General Purpose", accord-
ing to the U.S. Bureau of the Census, was 40.9%. IBM's share of the value of
1971 shipments of "direct access storage units such as magnetic tapes and drum,
magnetic cord and bulk core memory", according to the U.S. Bureau of the
Census, was 30.4%. Its share of the value of 1971 shipments of "serial access
auxiliary storage units such as magnetic tape units", according to the U.S. Bu-
reau of the Census, was 45.6% ; its share of the value of 1971 shipments of
printers, according to the U.S. Bureau of the Census, was 38.3%. These shares
have been declining. IBM's share of reported EDP revenue has declined from
04.1% in 1952, to 35.1% in 1970, and there have been comparable declines in
utiiers of the categories above-mentioned.

FG2. The figures on market share particularly with reference to plug com-
patible peripherals are not readily available from published sources, nor can
they be extrapolated or inferred from census data dealing with peripheral prod-
ucts in general, some of which have been cited above. But the defendant, in the
processing of its marketing strategy and planning, developed an organization
and system well designed to segregate these data, since its studies were directed
.specitically to the narrower markets. Accordingly, while the court has considered
the general data available, and inferences reasonably to be drawn therefrom, it
has seemed fair and appropriate to afford considerable weight to data available
from defendant's studies, and it has .

FG3. The inception of a related market was natural because of the dominance
IBM products commanded iu the marketplace and the feasibility of furnishing
functional equivalents to some of these products which could be rendered plug
compatible with IBM CPU's. The devices marketed by Telex and others plugged
into and replaced parts of the System 3G0 family, and ultimately parts of the
370 family were replaced. Notwithstanding some difficulties of rendering in-
terfaces compatible, and developing the personnel and technology to design and
mauufacture or otherwise secure equivalent devices, entry was initially easy for
Ijeripheral eciuipment manufacturers because they could choose to copy only
proven successful products. Moreover, they could utilize in many instances systems
hardware provided by the system manufacturer and typically would sell only
after all systems engineering, systems marketing, side preparation and systems
installation work had been completed. The number of companies supplying
peripheral equipment plug compatible with IBM systems grevs' from 2 or 3 in
l!)(j(> to some 100 today. A number of these handled only one type of device
and few if any had the variety of peripheral devices plug compatil)le to IBM
CPU's that Telex had. The relatively large number of companies in time engaged
in the plug compatible business did not represent a corresponding dispersal of the
business, since the major share during the developing years was concentrated
within a matter of a dozen plug compatible manufacturers (PCM).

F04. Of course, with respect to the IBM peripherals later replaced by plug
compatible devices of other manufacturers, IBM initially had 100% of the mar-
ket. But as the plug compatible business developed on the part of other manufac-
turers or suppliers, IBM's market share was substantially eroded, and in due
course it became a concerned competitor for peripheral devices to be attached
to its own systems. Starting in 1968 there was a very rapid growth in the
<iuantity of equipment shipped by peripheral equipment manufacturers which
was plug compatible with IBM CPU's. This occurred first with tape drives in
V.ms and then with disk drives in 1969 and this plug compatible growth continued
into and perhaps through 1970, and became in itself an important and r(K*og-
nized market which increasingly was enlisting new participants and inviting plans
for further expansion.

FG5. The increase in plug compatible business and the decrease in IBM's share
of the plug compatible market must be evaluated in light of the foregoing cir-
cumstances and the fact that it was not until 1970 that IBM's strategic and tac-
40-927 — 75 57



5726

tieal responses to the inroads of the plug compatible manufacturers became really
effective. The apparent vitality of the plug compatible market and the increase



Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 106 of 140)